Options are often treated with a rather cavalier approach, maybe because they are viewed as dealing with matters which may or may not happen. The case of Hallam Land Management Ltd v UK Coal Mining Ltd and Harworth Mining Ltd [2002], in the Court of Appeal, pushes the issue of clarity of drafting to the fore, emphasising the need for clear and unambiguous wording to cover all eventualities.

Background facts

The case related to an option over a 45- acre development site in Rotherham which obliged the developer to submit a planning application in respect of the site and to endeavour to obtain planning consent. If planning consent was granted, the price for the whole 45-acre site would then be calculated, by reference to the consent obtained, at the rate of £100,000 per ‘developable acre’.

A planning application was lodged, but only for development of 2.5 acres with the balance of the site being put aside for landscaping. Consent was refused. One of the main reasons for the (initial) refusal was that the local authority was considering a comprehensive development/infrastructure plan for the whole of the area (including the site) and felt that the application was premature.

The developer appealed and the Inspector allowed the appeal, approving the construction of a corporate headquarters building on the 2.5 acres and with the remainder of the site (approximately 42.5 acres) to be used as open space. Given that only 2.5 acres were developable under that planning consent, the developer’s calculation produced a purchase price of £250,000 in relation to the whole (ie 45 acre) site, notwithstanding its development potential.

The developer sought to exercise its option. The sellers refused and the developer applied to the court for an order to compel the sellers to comply with the option and to transfer the whole of the 45-acre site to the developer for £250,000. The court refused the application on the basis that the option agreement required the planning application to relate to the development of the whole of the site, and not just part of it. The developer appealed.

In the Court of Appeal

In the Court of Appeal it was accepted, given the local authority’s plans for the area, that the developer had tried to obtain the most comprehensive and, therefore, valuable planning permission likely to be obtained at that time. The developer also argued that whilst construction of the office headquarters was limited to only 2.5 acres, the remaining 42.5 acres were to be landscaped as a requirement of the planning consent. As this would involve engineering works, this constituted ‘development’ under the Planning Acts and, consequently, the planning application (and consent) related to the development of the whole of the site.

The Court rejected this argument and found in favour of the sellers, holding that, in order to comply with the requirements of the option, the developer’s application would have had to have been in respect of substantially the whole of the site. The court accepted that it was likely that in any such application there would be areas of landscaping and open space, but it was clear that an application for an area comprising only 5% of the total site did not satisfy the requirements of the option.

A ‘reasonable’ approach

The Court rejected the developer’s narrow technical/legalistic approach and found that no ‘reasonable person’ would consider the developer’s application to be one for ‘development’ of the whole property. (The landscaping of the remainder of the site was not so much development as the retention of the opportunity for the later development of the site.) The concept of ‘development’ was given its usual (non-Planning Acts) meaning: it required the construction of buildings on the site or the realisation of its potential value in some other way. Given the local authority’s plans for the area, it was likely that there were substantial future development opportunities for the remainder of the site.

The Court applied the earlier case of Investors Compensation Scheme v West Bromwich Building Society [1998], where it was decided that one must look at what the document would mean to a ‘reasonable person’ having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

In Hallam, the Court effectively held that the meaning of the words in the documents should be construed not in their legal dictionary/textbook meaning, but in the context of the actual scenario, as they would be interpreted by the reasonable person.

The Court appears to have been influenced by the potential windfall profit to the developer that would otherwise have resulted if the decision had gone against the sellers. It was prepared to look at the intention of the parties and what was reasonably contemplated by them at the time the option agreement was exchanged and take a flexible objective approach.

Comment

Compare this with the ways that the courts have sometimes interpreted rent review clauses, for instance – by applying the ‘commercial purpose’ of the clause or the ‘presumption of reality’. In doing so they have occasionally avoided what would otherwise be a manifestly unfair decision.

In another situation, where the unfairness of the outcome might not have been so stark, the court may not have been inclined to be so pragmatic. The simple point is that, to avoid arguments, the drafting must be clear and the wording reflect the intent of both parties; where the draftsperson is relying upon a legal ‘term of art’ they should ensure that the effect is clear and agreed.

Case references Hallam Land Management Ltd v UK Coal Mining Ltd and Harworth Mining Ltd [2002] EWCA Civ 982 Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896

Drafting lessons arising from Hallam

There are other lessons to be learned from Hallam.

Allowing for all eventualities Although the definition of 'developable acre' specifically excluded any areas designated for landscaping, the court focused on the requirement of the developer to submit an application for the development of the whole of the property (being the whole of the 45-acre site) as opposed to an application for the development of a 2.5-acre site with 42.5 acres of landscaping on whether the planning permission was for the whole 45-acre site or merely for 2.5 acres with and the potential to develop the remaining land in the future. It therefore followed the definition of 'developable acre' given in the contract, ie that landscaping areas were not included in the definition of development of the property.

With hindsight, the parties should have considered what would (and did in fact) happen if planning consent was only granted for a small part of the site and, possibly:

1. provided for a minimum purchase price; and/or

2. prevented the developer from requiring the transfer of more than the area of land required to implement the planning consent granted; and/or

3. required a valuation of the land transferred with the benefit of the planning, that valuation determining the price to be paid.

Approvals

In Hallam the developer submitted the planning application, as is often the case. The seller does have the option to object to the planning application in its capacity as landowner. However, option agreements often contain provisions that restrict the seller’s ability to object. It is not clear from the case notes whether there was such a provision or whether there was a provision for the approval of the application by the seller.

A further drafting point is to provide for the seller to object if the planning application is not for a preagreed development proposal – here the developer seems to have had a lot of flexibility, and if it had been tied to a particular application, the problem would have been highlighted sooner.

In any event, in many circumstances the seller should insist on a joint application being submitted by the buyer and the seller. This will help the seller step in and continue with the application or appeal, as the case may be, where the buyer submits the application but decides not to proceed, especially if this is combined with a licence to use all drawings, plans and so on submitted with the application. If a joint application is not made originally, the seller will be faced with starting the application from scratch.

Denise Sexton is a senior assistant in the real estate department at Field Fisher Waterhouse.

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